India’s Ease of Doing Business to be Improved with New Companies Amendment Act

July 7, 2015 Posted by India Briefing Reading Time: 5 minutes

By Nishant Dixit

India’s Companies Amendment Act of 2015, effective May 26, updates the previous 2013 amendment with new provisions designed to improve ease of doing business. It addresses issues such as incorporation, corporate governance and management of subsidiaries. Provisions that will affect foreign companies doing business in the country are discussed below.

Incorporation and Business Commencement

Incorporation processes have become much easier under the amendment.

The 2013 law required minimum paid-up capital of up to INR 0.1 million (US$ 1,572) for private companies and INR 0.5 million (US$ 7,862) for public companies. These requirements have been removed completely; no initial capital will be required to incorporate a private or a public limited company.

Requirements for a common seal for all official authorizations and attestations have been made optional. The amendment accepts a company director’s signature as a substitute for a common seal.

Under the 2013 law, businesses needed to apply for a certificate to commence business in India after incorporation. This requirement has been removed.

Board Resolution Confidentiality

Under the 2013 law, Board resolutions were public and could be accessed from the Registrar of Companies (RoC). The amendment removes this provision; no individual will be able to obtain copies of board resolutions passed by a company and filed with the RoC.

Loans to Wholly Owned Subsidiaries (WoS)

The amendment clarifies that holding companies can lend to their wholly-owned-subsidiaries (WoS). They can provide guarantees on a loan made by a bank or financial institution to the subsidiary. However, holding companies can only lend to their WoS under the condition that the funds will be utilized by the subsidiary for its principal business activities.

Divided declarations by a company having losses

The amendment adds an additional provision to Section 123(1) under which companies will not be allowed to declare dividends unless carried over past losses and depreciation in previous years are set off against profit of the company for the current year. There have been major cases of companies paying dividends despite making losses in order to satisfy shareholders and lenders. The amendment has already had some effect. On July 2, Everready Industries canceled declared dividends, citing the new amendment because it had a carried forward loss of INR 10 million (US$ 158,000).

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Related Party Transactions

Under amendments made to section 188, related party transactions above INR 10 million (US$ 158,000) can now be approved with a resolution instead of a special resolution. Additionally, no resolutions need to be passed for related party transactions between a holding company and its WoS if their accounts are consolidated and placed before shareholders in a general meeting for approval.

Punishments for failing to repay deposits

The amendments provide specific punishments to deal with failure to pay back depositors under Section 73 and Section 76 of the 2013 law. A company, in addition to paying the amount of deposit or interest due, will be punishable with a fine which shall not be less than INR 10 million (US$ 158,000) but which may extend to INR 100 million (US$1.6 million). Also, every officer of a company who is in default shall be punishable with imprisonment, which may extend to seven years, or with a fine which shall not be less than INR 250,000 (US$3,900) but which may extend to INR 20 million (US$315,000), or both.

More Reforms Ahead

While the amendments clarify certain legal provisions and loopholes, other barriers to doing business remain. Foreign exchange controls, ceilings that restrict foreign ownership of Indian companies, and regulations that complicate transactions make incorporation and acquisition extremely difficult. For example, under the 2015 Companies Amendment Act, companies may lend to their subsidiaries but restrictions from the Reserve Bank of India will still apply.

In order to address other concerns from businesses related to the 2013 Company Act, the government has constituted an expert Committee to review and examine the possibility of further amendments to the act. Finance Minister Arun Jaitley stated in the local media that the expert committee will review approximately 50 provisions in the 2013 Act. The government may release another round of amendments based on the committee’s suggestions. The committee will submit its recommendations within six months of its first meeting.

The amendments to the Companies Act, 2013 demonstrates that the government is committed to making the law more responsive to the domestic business and foreign investment community. The amendments show that the government is willing to amend aspects of the law that are not working for businesses in India, while the establishment of a review committee is an encouraging development. Although many in the private sector had hoped that the government would enact a more comprehensive Companies Act reform, the Companies Amendment Act, 2015 will improve the ease of doing business and will prove to be a step in the right direction.

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